Samsung Takes Aim At Google's Revenues

Summary

Samsung has played a crucial role in making Google’s Android the world’s most popular mobile platform.

Samsung has finally launched its highly anticipated Tizen based smartphone, the first of its kind, in a bid to reduce its reliance on Android.

This, however, is not just about one smartphone as Samsung’s move can have far reaching implications.

Samsung (OTC:SSNLF) (OTC:SSNGY) has been looking for an alternative to Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android for the last couple of years. It has been working with Intel (NASDAQ:INTC) to develop Tizen, a Linux- based open source operating system that, so far, has not gained any meaningful foothold in the industry.

With Samsung backing, however, that can change.

Enter Tizen

Last year, in October, Samsung launched its smart camera called NX300M that ran on Tizen. This was the first consumer product developed by Samsung that ran on the open-sourced software. Then in February, 2014, Samsung launched Samsung Gear 2, a smart-watch running on Tizen.

As expected, the company is now gearing up to launch its first Tizen based smartphone called Samsung Z, in Russia, before the end of September, 2014. This will be the first ever Tizen-based smartphone. The company has planned to initially introduce the smartphone to its customers in the emerging markets where Samsung already dominates, such as India and Russia, before bringing it to the U.S. and Europe.

With Samsung Z, those who are accustomed to using the company's Android-based smartphones will not find any significant difference in terms of user interface. Samsung Z even comes with a fingerprint sensor and a heart rate monitor, the two features that were introduced in Galaxy S5.

The only noticeable difference is that on the home screen, Tizen-based phone has round app buttons, instead of the traditional square buttons in Android phones.

But Why?

The biggest advantage for Samsung here is that it will be able to reduce its dependency on Google. Google keeps a tight control over Android and has shown its willingness to remove its core apps, such as Gmail, Maps and Docs, from highly customized versions of Android.

Moreover, Google not only provides a platform for Samsung's phones, but also for a number of other vendors. Samsung's attempt at developing its own operating system is one of the ways through which it can achieve product differentiation.

This could result in a strategic shift for Samsung, which earns billions, each year, by selling electronic devices but has almost no presence in the mobile OS market which is dominated by Google and Apple (AAPL).

In the long run, if Tizen becomes successful, then this could lift Samsung's revenues from app downloads. The company's Android phones, such as the Galaxy series, have a Samsung apps store, besides the Google Play Store. Samsung, however, gives a very small selection of apps, asks for a new Samsung account and the platform is difficult to use. For its Tizen phones, however, users will not have any other option besides using the Samsung apps store.

Samsung can also gain a lead in the internet-of-things space by having Tizen-powered smart devices connected through its operating system and controlled through its smartphones. Intel's Imad Sousou has said that Tizen is not just about phones, but also about wearable devices, cars, televisions, cameras and home appliances.

Samsung already sells a variety of smart electronic devices, including televisions and fridges. The company will likely launch Tizen apps that could control these devices, like Apple's HomeKit. Samsung already has a service which is similar to HomeKit called Smart Home. But at the Tizen Developers Conference held a few weeks ago, Samsung featured its Tizen-powered smart home service.

For now, there aren't any Tizen-based smartphones available that can control the smart home and office devices. However, ten years from now, our purchase decisions for consumer electronics could get influenced by whether the device is "Made for iPhone/iPad/iPod" or "Made for Samsung Z/Galaxy Phone/Galaxy Tab".

Samsung's dominance

Last year, Samsung sold 319.8 million smartphones, becoming the biggest player in the industry, ahead of Apple which sold 153.4 million units. In the first quarter of 2014, the South Korean consumer electronics behemoth sold 85 million smartphones, greater than the combined sales of its four nearest competitors: Apple, Huawei, LG and Lenovo.

By selling hundreds of millions of smartphones each year, all over the world, Samsung has played a crucial role in driving the growth of Android. According to Chitika, Samsung generates more than half of all the North American Android traffic. Clearly, Google should be worried if Samsung decides to shift to another OS for its mobile devices as such a move can potentially bludgeon its mobile ad revenues.

An Uphill Task

Currently, Tizen does not pose any threat to Google. Tizen-based devices won't have access to Google's Play Store, which currently features more than a million apps. Samsung's Tizen , on the other hand, features just a handful of apps. As a result, the Samsung Z will primarily rely on the HTML-5 apps. The absence of an app ecosystem could scare away consumers.

Samsung and Intel still have a lot of homework to do before they can effectively compete with Android. The two companies, however, are luring developers with massive cash prizes.

Samsung and Intel are welcoming developers to an app development challenge in which the winner will be given cash prizes of between $50,000 and $200,000. Overall, the two companies will give away $4.04 million to 50 winning developers of game and non-game applications.

Previously, Samsung said that once an app is launched on the Tizen store, the app developer will get all of the revenues generated by the app for a year.

Amazon's Fire

While Samsung has relied on Google's Android platform and all of its core features, Amazon (AMZN) has been offering its Kindle tablets that ran on Fire OS. Fire OS is Android based, but it is open sourced so it does not have the "Google Experience." In other words, while it can run Android apps, it does not have access to the core Android offerings, including Play Store and Google's homegrown apps.

Yesterday, Amazon launched its highly anticipated Fire smartphone that features 3D images and hands-free scrolling. And it comes with Fire OS. Amazon, like Samsung, is also eyeing app revenues.

Bottom Line

Samsung is looking to cut its reliance on Google's Android OS by launching Tizen-based devices. While it doesn't threaten Google in the near term, in the long run, the company can make a strategic transition to Tizen, particularly in the emerging markets. This could create problems for Google's mobile revenues. If other device makers start following in Samsung's footsteps, or even in Amazon's footsteps, then this could further exacerbate the situation for Google.

For Samsung, however, the success of its Tizen-based smartphone can transform it to a hardware and software company.

Additional Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Ali I., research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan nor Ali I. have any positions in the stock(s) mentioned in this article.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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